JPM with Nobias Technology: Case Study on JP Morgan
J.P. Morgan (JPM) reported its second quarter earnings on Thursday, July 14th, missing Wall Street consensus estimates on both the top and bottom lines. The company posted revenues of $30.7 billion, which were $1.12 billion lower than consensus. JPM’s GAAP earnings-per-share totaled $2.76, which was $0.13/share below Wall Street’s average target.
Nobias 5-star rated author, AJ Fabino, covered the company’s quarterly report in an article at Benzinga, stating, “Shares of JPMorgan fell to a new 52-week low on Thursday following the release of the report, falling 4.10% to $107.31 in the morning; here are more details.”
Regarding the company’s press release, Fabino quoted JPMorgan CEO Jamie Dimon who said, “Geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go, and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.” This bearish sentiment from management came after the company produced relatively poor bottom-line results.
JPM Jul 2022
Fabino stated, “Net income (profits) came in at $8.6 billion: Down 28% in the same period last year, predominantly driven by a net credit reserve build of $428 million.” In light of the negative profit growth, JPM management decided to reduce shareholder returns. Once again, Fabino quoted Dimon, who said, “We have temporarily suspended share buybacks which will allow us maximum flexibility to best serve our customers, clients, and community through a broad range of economic environments.”
Moving forward, Fabino noted, “The capital that would’ve been used in the share repurchase program will be shifted to help the company reach its regulatory capital requirements.” In short, because of macro concerns and ongoing global headwinds, J.P. Morgan is preparing for an even deeper economic slowdown.
Despite Dimon’s relatively cautious remarks which spooked many investors across Wall Street, after JPM’s Q2 earnings were announced, Nobias 4-star rated author, Stjepan Kalinic, published a report at Simply Wall Street which expressed bullish sentiment, largely due to the stock’s low valuation.
Kalinic highlighted some of the cautious commentary from JPM management during the quarterly release, stating, “In recent months, CEO Jamie Dimon has been rather vocal about a potential recession incoming, pointing out geopolitical and economic challenges of high inflation, supply chain issues, and geopolitical conflicts. Yet, he remains optimistic about handling the recession, noting that the consumers are in relatively good shape – spending money and having access to a strong labor market.” He continued, “While CEO Jamie Dimon remains optimistic about the bank's capabilities to navigate through a (potential) recession – the bank is already taking preventive actions, the first among them being a suspension of stock buybacks.”
On the subject of buyback suspensions, Kalinic noted that investors should be grateful that JPM continues to provide shareholder returns in the form of a quarterly dividend. He wrote, “Given the recent stress test results, a decision to suspend the buyback isn't surprising, but the good news is that the bank won't cut the dividend.”
Looking at the quarterly results, Kalinic highlighted a slew of fundamental metrics:
Revenue: US$31.6b, +1% Y/
Net income: US$8.64b (US$2.76 per share): -28% Y/
Credit costs: US$1.1b (US$428m net reserve build, US$657m net charge-offs
Average deposits: +9
Average loans: +7%
He then stated, “The Consumer Banking arm was the biggest loser, with net income declining 45% Y/Y. On the other hand, Asset & Wealth Management arm declined "just" 13% Y/Y.”
Regarding JPM’s fundamental growth, Kalinic stated, “Recent times haven't been advantageous for JPMorgan Chase as its earnings have risen slower than most other companies. A Low P/E of 7.8x is probably low because investors think this lackluster earnings performance will not get any better.” But, he notes that these subpar earnings results haven’t always been the case for this stock.
Kalinic wrote, “Looking back, the company grew earnings per share by 7.1% last year. This was backed up by an excellent period before seeing EPS up by 48% in total in the previous three years. Therefore, it's fair to say the earnings growth recently has been superb for the company, yet - over the last 10 years, JPMorgan stock has lagged the S&P500 increase.”
Overall, after looking at all of the quarterly data and JPM’s current valuation, Kalinic concluded, “At the moment, JPM trades at an attractive valuation. Still, its attractiveness remains mainly a question of whether an investor is comfortable with high exposure to the investment banking segment, which seems to be heading for more challenging times.”
Yet, in recent days we’ve seen another credible Nobias author publish a post-earnings report which came to a different, much more bearish conclusion. In a recent article published at Seeking Alpha, Nobias 4-star rated author, Cory Cramer, highlighted the highly cyclical nature of J.P. Morgan’s earnings and established a bearish price target for JPM shares using historical data.
Cramer said, “The rough earnings growth decline threshold I use to declare a business either "deep cyclical" or "less-cyclical" is -50%. This level can actually vary quite a lot from bank to bank, depending on what kind of bank it is and their loan practices or whether they are an investment bank or a traditional bank. In the end, all I care about are their historical earnings patterns. In JPM's case, because of the -69% decline in earnings growth in 2008, combined with various other years of double-digit earnings growth declines, I would classify JPM stock as a "deep cyclical" stock.” He noted that, “Obviously, JPM has changed over the decades and it is not the same company it was in the 1970s or 1980s, but I find it's always useful to start with a big picture view first so that we have some idea of what is possible.”
Looking at past data, Cramer said, “During the big downcyles it is typical for JPM's stock price to fall about -70% off its highs. This happened during the 1987, 2000, and 2007 downcycles. I think it's reasonable, most other things being equal, to be prepared for the stock to fall that far if we have a bad recession this downcycle.”
When attempting to find connections between the past and the bear market that investors are witnessing today, Cramer stated, “Generally speaking, I think the 2000 stock market decline has the most in common with our current decline. But I think JPM was about 20% more overvalued at the 2000 peak than it was at the 2021 peak based on their peak pre-recession P/E ratios.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
However, he noted that JPM’s valuation was more attractive at the start of the recent drawdown than it was prior to the dot-com boom/bust period and therefore, he believes that the stock’s downside potential is limited towards the lower end of the historical range that he established.
Cramer said, “Based on these past declines, an expected price decline this time around is somewhere between -60% and -70%. I'm inclined to think there is more cash floating around going into this coming recession, and there are a lot of retirees who would probably be willing to come in and buy JPM stock because they know the name well, and JPM is perceived as relatively safe. So, I wouldn't count on JPM stock falling into the deeper end of that range, and I would consider buying after a -60% drawdown, rather than aiming for a deeper decline (at least initially).” With that in mind, he concluded, “JPM's price peaked at about $172.96 this cycle. If it sold off -60% from there, that would produce a buy price of $69.18 per share, and that's when I'll be a buyer.” All in all, Cramer wrote, “Currently, that would be a buy price of $69.18, which is about -35% lower than where the stock trades today.”
Overall, the vast majority of credible authors and analysts that the Nobias algorithm tracks take the bullish side of the argument when it comes to JPM shares. 91% of recent articles written about the stock by credible authors (only those with 4 and 5-star Nobias ratings) have expressed a “Bullish” bias. Right now, the average price target being applied to JPM shares by the credible Wall Street analysts that our algorithm tracks (once again, only those with 4 and 5-star Nobias ratings) is $140.88. JPM closed the trading day on Friday at $112.95. Therefore, relative to this average price target, JPM shares present upside potential of approximately 24.7%.
Disclosure: Nicholas Ward has no JPM position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.